Estimating the Cost and Benefit of Hosting Olympic Games: What Can Beijing Expect from Its 2008 Games?

THE FALLACY OF ECONOMC IMPACT STUDIES

Economic impact studies have become standard operating procedure for supporters of public funding for sports teams or events. Their prevalence has led to acceptanceof their findings by the public, media, and even academic circles with little or no critical evaluation. Because of the high profile of such events, large (and positive) economic effects are taken as given; the studies confirm what is already believed. Short et al (2000) provides an example of a typical statement: “The promise of worldwide exposure and economic gain has made hosting these major and regularly scheduled sporting affairs a lucrative goal for aspiring cities around the world” (Short 2000, p. 320).[yx1] 

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The simple elegance of economic impact studies, injections of money circulating over and over in an economy to create a multiplier effect, has an alluring “something-for-nothing”quality that is hard to refute. The mistakes made in economic impact studies are so numerous that making a lucid counter-argument can be difficult. Critics have focused primarily on the following areas of misapplication: treating costs as benefits, ignoring opportunity costs, using gross spending instead of net changes, and using multipliers that are too large.[yx2] 

In many cases the cost of constructing stadiums, which to a large degree is spent on hiring construction workers and purchasing materials from local suppliers, is counted as a benefit to the local economy.[yx3]  This is arguably the most egregious error in economic impact studies. ……If the economy is at full employment, the workers needed for the stadium would have been doing something else: public investment crowds out private investment. During a period of high unemployment it could be argued that the project gives jobs to people who would otherwise be idle, in which case the expense of the stadium is at best a transfer from one group to another; still not a benefit.

Counting construction costs as a benefit is also an example of a more general error of economic impact studies: failure to recognize opportunity costs.[yx4]  ……

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In this way a multiplier also magnifies the errors made in calculating initial impact, especially by once again failing to recognize opportunity costs.[yx5] The multiplier is applied to any new spending in the economy regardless of the source. If the multiplier does not depend on the spending source, then it is useless in the comparison of alternative projects—the multiplier cancels out.

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In addition to the standard projections of economic impact, Olympic studies also include longer term benefits sometimes referred to as the “Olympic Legacy.” These legacy effects, derived from positive publicity from the Games, include increased tourism after the Games, attraction of business, and infrastructure investments that improve the urban environment. Legacy impacts are generally not incorporated into the economic impact numbers, but rather offered as an additional, unquantifiable benefit. The lack of any ex post study that finds improvements in economic growth or living standards due to mega-events should cast some suspicion on the legacy effects of Olympics, or at least the ability of such effects to be transformed into real economic benefits to the local economy. Baade and Matheson (2002) found “the evidence suggests that the economic impact of the Olympics is transitory, one- time changes rather than a ‘steady-state’ change” (p. 28).

It has also been argued that the Olympic Games can advance a city in the hierarchy of “world cities.” According to Short et al (2000), “some of the most important global spectacles are sports mega-events such as the Olympics which reach a worldwide television audience and offer perhaps the best stage upon which a city can make the claim to global status” (p. 320). The world cities concept is closely related to the Olympic legacy, especially regarding tourism, which is seen as a modern arena of economic competition among cities. “During this latest phase of globalization, when tourist attractions are highly prized, many cities are repackaging the old with new accommodations or accessibilities to re-present themselves as living history and to take advantage of the global tourism economy”(Short 2000, p. 319). It is easy to see how a city such as Beijing would find the Olympics appealing in this context.[yx7]